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Long march for Australia, China FTA

Wednesday April 20, 2005

AUSTRALIA WATCH: Long March For Australia, China FTA

By Owen Brown


SYDNEY (Dow Jones)—Fifteen years. That is how long China dragged out negotiations for its entry into the World Trade Organization. And there’s no reason to believe that finalizing a comprehensive free-trade agreement with Australia will be any less painstaking.

Australian Trade Minister Mark Vaile insisted Wednesday that no sectors will be set aside in negotiating a preferential bilateral trade agreement with China.

But if Australia is to achieve an agreement that includes highly sensitive sectors such as agriculture, then such comprehensive negotiations might take a lot longer than the political time table envisaged by the Howard government.

To be sure, Australian Prime Minister John Howard has conceded that the agreement won’t be finalized within the next year. "There is a lot of goodwill around," Howard told reporters during this week’s visit to Beijing. "But not that good."

Even then, political imperatives might push Australia to give away too much for too little if it wants China to sign on the dotted line while the Liberal-National coalition government retains power in Canberra.

The Australian political cycle suggests an agreement will have to be secured by 2007 at the latest if the Howard government wants to use the completed deal to boost its campaign in the next federal election due late in that year.

That’s plenty of time for China to drag its heels to protect sensitive sectors of its economy.

"How long it will take will depend on how much the Australian government is prepared to give away," Richard Braddock, director of the Asia Pacific Research Institute at Sydney’s Macquarie University, told Dow Jones Newswires.

"Otherwise it will take a long time, which is traditionally China’s negotiating style."

At stake is the possibility of boosting Australia’s economy by up to US$18 billion and China’s gross domestic product by up to US$64 billion in the decade from 2006-2015, the feasibility study recently issued by both countries says.

Based on GDP of about A$800 billion, a free-trade agreement could add about 0.003% to Australia’s total economy. That’s if Australian negotiators are successful in wringing the necessary concessions from their Chinese counterparts set out in the feasibility study.

Enforcing Trade Agreements

Should Australia’s government provide suitable concessions to ensure a relatively quick outcome before the end of this decade, the agreement might still not deliver the hoped-for boost to bilateral trade if recent international experience with China’s ability to honor its commitments is any kind of measuring stick.

The years since China’s entry into the World Trade Organization in late 2001 have shown that while Beijing can be quick to give legislative force to its market-opening commitments, its courts and enforcement procedures have failed to live up to the government’s rhetoric.

Braddock said ensuring the role of "rule of law" is one of the most crucial aspects to be tackled as Australia negotiates an agreement.

Chinese officials currently intervene in most levels of law enforcement with no independent judiciary to speak of. Regulations often favor local players in contravention of the spirit of the WTO’s market opening ethos.

In the case of intellectual property rights, China’s beefed up copyright, trade mark and patent laws may be WTO compliant but they are simply flouted daily by counterfeiters and street vendors.

China has also been criticized for using scientific and other regulatory hurdles to delay the opening of its agricultural markets even by the minimal levels required by its entry into the WTO. Soybean imports were held up for more than a year by China’s adoption of new labeling standards.

Meanwhile, Beijing has been increasing direct subsidies to its farmers to cushion them from the impact of competition from imports.

Also weighing in China’s favor is the decision to confer market economy status as a precursor to the free-trade negotiations.

With that already in the bag, Beijing won’t feel the need to rush to a conclusion which involves giving too many concessions to Australia.

Rather, China has its much sought after market-economy status and continued access to an Australian economy that is already wide open by global trade standards even without a preferential bilateral agreement.

Under global trade rules, granting market economy status to a country lessens the scrutiny applied to domestic pricing policies, a major factor in investigating trade disputes such as dumping.

China’s international campaign for market-economy status 12 years ahead of a timetable agreed with the WTO reflects Beijing’s disappointment at a barrage of antidumping cases since its entry into the global trade group.

Having Australia agree to acknowledge China as a market economy also provides Beijing a stick to wield in its attempts to cajole the U.S. and the European Union to do likewise.

It also ignores the reality that China is still a long way from becoming a market economy, at least as determined by the E.U. in its detailed reasoning issued in 2004 for rejecting China’s request.

China’s command and control system is still very much in play 25 years after the government began to experiment with giving the market greater play to set prices and influence production.

The central government’s efforts to slow the economy since late 2003 have owed more to administrative controls than market-based measures.

Even in China’s often-tortured semantics, the official goal isn’t to achieve a fully open domestic market but rather a "socialist market economy with Chinese characteristics," although the precise meaning of that sobriquet remains deliberately ambiguous.

Braddock points out that Australian negotiators will have their work cut out for them trying to determine the true market price in China where production is often subsidized, soft loans are provided by state-run banks and the state is still heavily involved in determining industrial policy.

"The difficulty is determining what is subsidized and what goods are priced according to market prices," he said.

"China wants the advantages of being in the WTO and having free-trade agreements but it isn’t prepared to pay the price of fully marketizing."

For China, simply signing the agreement with Australia to begin negotiations has been trumpeted as a diplomatic coup in itself, regardless of the eventual outcome.

"I think it (signing the agreement to formally initiate negotiations) is of great importance, since it is the first time China is to work on a bilateral free trade arrangement with a developed country," said Han Feng, a researcher at the Chinese Academy of Social Science’s Institute of Asian Pacific Study.

The potential for foot dragging apart, Han remained confident that the two countries negotiating preferential access to each other’s markets will ultimately force China to move further toward a more open economy.

"Holding such talks with a developed country is a big step forward in the process of liberalization," he told Dow Jones Newswires.

 source: Dow Jones Newswire